The document provides capital market assumptions and expected returns for various asset classes over the long term. It estimates that UK equities will return 10-12% annually, fixed income will return 5.5-6.5% annually, and a balanced portfolio of equities and fixed income will return 7-9% annually. It emphasizes maintaining a diversified, long-term investment strategy tailored to one's goals and risk tolerance in order to achieve these estimated returns.
1. RES-4869-U JUL 2009 Page 1 of 2
U K S t r a t e g y r e p o r t
expectationS for capital MarKet retUrnS
When you invest, youโd like to know what youโll receive in the future: the return on your investment. Unfortunately, we
canโt accurately predict future investment returns. However, using the past performance of different investments and
current conditions, we can make some assumptions about the range of likely future returns. The Edward Jones Investment
Policy Committee (IPC) recently reviewed current capital market assumptions and concluded equity returns are likely to
be slightly higher, whilst fixed income and inflation are slightly below the range of long-term historical returns.
The long-term annual rate of return on the FTSE All-Share Our capital market assumptions are designed to assist
was 8.3% per year between 1988 and 2008, somewhat you and your financial adviser when:
lower than its performance over longer times. As a result โโ Selecting a portfolio objective
of the severe decline in the stock market, the outlook for
โโ Determining the appropriate withdrawal rate
UK equity returns is higher. Our expectation is for long-
term equity returns in the range of 10% โ 12% per โโ Discussing other decisions to help achieve your
annum, and long-term fixed-income returns averaging long-term financial goals
5.5% โ 6.5% per annum. As a result, if your portfolio is
Whilst past performance does not indicate future
split evenly between equities and fixed income, its
results, the guidance combines our views on the current
average annual return range is 7% โ 9%.
environment with long-term historical performance.
Portfolio Objectives
Each portfolio objective is a mix of shares and fixed-income investments designed to reflect your comfort with risk
and your investment time frame. The capital market assumptions are for markets in general. We have taken the
recommended mix of assets for each portfolio objective to estimate the range of annualised returns you might expect
if you own your investments for 10 years or more. Remember, however, each yearโs returns are generally going to be
quite different from the long-term averages suggested below.
Balanced Balanced Balanced
Preservation towards Growth & towards All-equity
portfolio objective of Principal Income Focus Income Income Growth Growth Focus Focus
Range of Expected
3% โ 5% 5% โ7.5% 6% โ 8.5% 7% โ 9% 8% โ 10% 8% โ 11% 10% โ 12%
Long-term Portfolio Returns
Risk and Return
Looking at 10 years or longer, diversified equity UK Market Perspective 1970 โ 2008
investments have almost always provided higher returns ยฃ1,000
than fixed-income investments (bonds), and fixed-income Compound annual return
UK shares 11.5%
investments generally provide higher long-term returns
ยฃ100 Bonds 9.7
than cash investments, such as savings accounts. In
Savings accounts 8.5 ยฃ69
contrast, the variation of returns from year to year ยฃ37
Inflation 6.6
historically has been highest for equity investments ยฃ24
ยฃ10
and lower for fixed-income investments. ยฃ12
The higher returns from owning shares over time tend to
compensate investors for tolerating fluctuations in the ยฃ1
value of their portfolios. Most investors own portfolios that
include these three asset classes (equities, fixed income
ยฃ0.10
and cash) to provide a combination of relatively stable 1970 1980 1990 2000
returns with those that vary more greatly.
All values are represented in GBP. Past performance is not a guarantee of future results.
Hypothetical value of ยฃ1 invested at the beginning of 1970. Assumes reinvestment of
income and no transaction costs or taxes. This is for illustrative purposes only and not
indicative of any investment. An investment cannot be made directly in an index.
ยฉ 2009 Morningstar, Inc. All rights reserved. 1/4/2009
2. RES-4869-U JUL 2009 Page 2 of 2
How Edward Jones Makes Capital Market Assumptions Inflation
The Edward Jones IPC reviews the assumptions about One of the biggest risks for long-term investors is inflation
capital markets semiannually. These assumptions are (or rising prices). Whilst inflation has averaged 4.1% since
designed for current investments, so they take into account 1980, it has ranged from a low of just under 1% to over
the current environment as well as the historical performance 16%. The 2009 recession is likely to keep price increases
of various assets. They are based on: subdued over the next few years, but thereafter we expect a
โโ Inflation rates return to moderately low inflation, similar to the recent past.
Our expectation is for inflation to average 3.0% per year
โโ Dividend yields on UK and foreign equities
over the next decade. Investments that provide rising
โโ Expected growth rates of earnings and dividends income help address the impact of inflation.
โโ Price-to-earnings ratios (or price-to-dividend ratios)
How Much Should Capital Market Assumptions
โโ Current interest rates on fixed-income investments
Change over Time?
โโ Historical relationship among various investments We think the range of expectations about future investment
returns should not change very much over time. From
Our current assumptions are:
year to year, stock market prices and current interest rates
Inflation: 3.0% typically vary widely, but good and bad short-term
Equities: 10% โ 12% performance tends to average out over time. As a result,
Long-term fixed income: 5.5% โ 6.5% longer-term returns vary much less widely, as shown
below for the returns of the FTSE All-Share Index from
Cash: 3.0%
1963 to 2008. The first histogram shows one-year returns,
As a result, if your portfolio is split evenly between equities which ranged from a decline of more than 40% to returns
and fixed income, its average annual return range is 7% โ 9%. of more than 40%. The 10-year annualised returns are
mostly clustered together between 0% and 25%.
FTSE All-Share Index Total Return 1963 โ 2008
One-year Total Return 2003
Source: Bloomberg, Edward Jones 2004 1999
1998 1997
2000 2007 1988 2005 1995 1993 1977
1994 2006 1981 1996 1992 1986 1989 1975
2008 2001 1990 1970 1987 1979 1972 1991 1983 1980 1971
1974 1973 2002 1969 1964 1966 1976 1978 1965 1963 1985 1982 1984 1967 1968
Return Less than -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% More than
Band -40% -40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
10-year Annualised Total Return 92-01
90-99
Source: Bloomberg, Edward Jones 98-07 87-96 91-00
97-06 85-94 89-98
96-05 73-82 88-97
95-04 72-81 86-95
94-03 71-80 84-93 80-89
93-02 70-79 83-92 79-88
69-78 68-77 82-91 78-87
99-08 66-75 67-76 81-90 77-86
65-74 64-73 63-72 74-83 76-85 75-84
Return Less than -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% More than
Band -40% -40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
Investors who are taking income from their investments need to pay particular attention to the variability of their
portfolios. The withdrawal rate needs to be considerably less than the long-term expected return on the portfolio to
reduce the chances of running out of money. After a severe decline in equities, withdrawals make the portfolioโs
recovery more difficult, since less remains invested.
Recommendations
As you review your portfolio with your Edward Jones financial adviser, keep in mind that you need a long-term investment
strategy to help you receive the long-term returns available in the market. Many investors fail to earn those returns because
they trade frequently and switch strategies at the wrong times โ usually selling investments that have declined and buying
those that have already risen. Our advice is to build a well-diversified portfolio with the mix of quality investments tailored
for your situation, review it periodically to ensure it remains appropriately balanced and stay invested over time. This
approach has helped investors on the path towards their financial goals in the past, and we think it will work for you as well.
Edward Jones Limited is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. Registered in England and Wales
No. 3403976. 11 Westferry Circus, Canary Wharf, London, E14 4HH. ยฉ 2009.
Kate Warne, ph.D., cfa
Market Strategist www.edwardjones.com